Producers slow spending in North America, accelerate in Eastern Hemisphere

By Collin Eaton, Houston Chronicle

Published 6:23 pm, Friday, October 4, 2013

Photo: Associated Press File Photo

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Chesapeake Energy, the largest U.S. driller two years ago, has retrenched. More recent drilling investment has been sluggish.

Chesapeake Energy, the largest U.S. driller two years ago, has retrenched. More recent drilling investment has been sluggish.

Photo: Associated Press File Photo

Producers slow spending in North America, accelerate in Eastern Hemisphere

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Despite rising production and commodity prices, investing at North American oil fields has turned sluggish.

This year marked only the third time in more than a decade that North American producers budgeted less than their cash flow forecasts allowed, reversing a trend that buoys sales in the U.S. oil field services sector and job creation in energy hubs.

At first glance, it's strange: No unexpected surge in prices pushed up cash flows, as in 2005, and no dead stop in the credit markets hit spending, as in 2008.

But the spending downturn of 2013 had several catalysts — last year's lower expectations for commodity prices, increased shareholder pressure for financial discipline and the retrenching of Chesapeake Energy, which was the largest driller in the nation two years ago.

A further roadblock is the lack of viable energy transportation infrastructure between new shale plays and U.S. markets.

“Why go out and drill when you don't have the pipeline to get it out?” said Marshall Adkins, an analyst at Houston investment banking firm Raymond James.

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After double-digit growth in two of the past three years, U.S. producers are projected to invest just 3.4 percent more than last year, according to a survey of 300 companies by Barclays.

Producers late last year made conservative budget forecasts, predicting prices of $85 per barrel for U.S. benchmark West Texas Intermediate crude and $3.47 per million British thermal units for Henry Hub natural gas. Prices have risen higher than that this year — ending last week above $103 for oil and more than $3.50 for gas.

Too, producers have sent a ton of money to the Middle East and the Asia-Pacific regions, as Saudi Arabia and other big producers reassert their dominance and China's appetite for hydrocarbons keeps growing.

Capital-intensive offshore projects also are popping up in those regions, and costs quickly can overrun expectations.

“That's the emerging frontier of available production growth,” Adkins said.

The global exploration and production industry hit a record $678 billion in capital expenditure projections this year, a 10 percent rise over 2012.

Spending by the integrated and independent producers has grown 28 percent in the Middle East and 19 percent in the Asia-Pacific regions, compared to 2 percent growth in North American investment over last year, according to Barclays.

Increased efficiencies at the wellhead have driven some of the North American investment slowdown, as companies boost production with fewer rigs and more wells. Rig count in the U.S. has fallen 5.27 percent this year, while oil and gas production in the U.S. climbed 15 percent, thanks to booming production in various shale plays, according to data compiled by Bloomberg.

“A lot of the companies are able to do more with less,” said Allen Good, an analyst with Morningstar.

Chesapeake Energy this year cut its spending nearly in half to $7.2 billion, a sharp change as new management looked to put some financial discipline into what was once one of the most aggressive U.S. energy companies. The Oklahoma City-based natural gas company chopped its rig count in half from two years ago, and that decline makes up half of the country's drop in active rigs, according to Raymond James.

Adkins said this year's slowdown in North American investment is hardly alarming, given the return of manufacturing, the balance of trade and the job creation stemming from the energy industry.

“It's one of the most bullish things in the U.S. economy,” Adkins said. “Cheap energy is giving us a huge advantage.”